AT&T takes stake in Net2Phone, trumps AOL

In the latest salvo in the AT&T Corp.-America Online Inc. war, Ma Bell and its partners said Friday they will acquire a 39 percent voting stake in Net2Phone, which provides Internet telephony and Web communications services.

An AT&T-led consortium, which includes Liberty Media and British Telecom (NYSE: BTY), will purchase 4 million newly issued Class A shares from Net2Phone at a price of $75 a share.

AT&T-Net2Phone: Great deal?

The consortium will also purchase 14.9 million Class A Net2Phone shares from IDT Corp. (Nasdaq: IDTC), currently Net2Phone's controlling shareholder, for $75 per share. IDT also inked agreements with AT&T and the Concert international venture.

The consortium will invest $1.4 billion in the deal, with AT&T accounting for 51 percent of the total. The transaction, which has been approved by the boards of AT&T, IDT and Net2Phone, is expected to close by the third quarter.

AT&T trumps AOL

The Net2Phone deal is the second warning shot fired by AT&T at AOL this week. Earlier this week, AT&T brought Excite@Home (Nasdaq: ATHM) under its control. The Excite@Home deal puts pressure on America Online (NYSE: AOL), which is merging with Time Warner (NYSE: TWX). AOL was also in talks to boost its stake in Net2Phone.

Inter@ctive Week reported last month that AOL, which owns a minority stake in Net2Phone, and Microsoft (Nasdaq: MSFT) tried to win over Net2Phone.

Net2Phone hung up on Bill Gates, but discussed a deal with AOL.

AOL planned to sell telephone service to its user base. The AOL deal, first rumored in February, was hung up on price. According to Inter@ctive Week, Howard Jonas, IDT's founder, chairman and chief executive, wasn't comfortable with AOL's final offer of $60 per share, which is $10 lower than the $70-per-share asking price leaked by IDT at the height of its negotiations with AOL in mid-February. AOL wouldn't even come up to $63 per share, a compromise sought by IDT, sources said. IDT owns 58.2 percent of Net2Phone.

AT&T chief C. Michael Armstrong, who hasn't shied away from paying top dollar in acquisitions, beat AOL's bid by a wide margin.

AT&T takes control

Once the Net2Phone deal closes, AT&T's consortium will have a 39 percent voting stake and a 32 percent economic stake in Net2Phone.

In addition, the consortium and IDT have reached an agreement that gives the consortium the right of first refusal to purchase IDT's remaining stake of 10 million Class A shares in Net2Phone. If the right is exercised, the consortium will have a 59 percent voting interest and a 48 percent economic interest in Net2Phone.

AT&T and its pals will also have the option to convert IDT's remaining 10 million Class A shares into common shares. Class A shares have two votes per share, while common shares have one vote per share.

AT&T said it expects the transaction to be neutral to cash earnings per share and minimally dilutive to earnings per share for the next few years.

Next-generation phone services

The reason Microsoft, AOL and AT&T were all vying for Net2Phone was simple -- next-generation communications services.

"Net2Phone has established itself as the Internet's very own phone company," said Armstrong, in a statement. "It handles two out of every five calls routed over the Internet."

Armstrong said the goal was to make telephones, Web pages and fax machines extensions of each other.

AT&T and Net2Phone said they plan to jointly develop new Internet voice applications for cable telephony and the business communications market. AT&T and IDT will each be granted a license to deploy Net2Phone's technologies on a guaranteed lowest cost basis.

It wasn't immediately clear what the AT&T-Net2Phone deal will mean for AOL. Net2Phone executives mentioned AOL as a key partner in its statement, but didn't elaborate. AOL wasn't immediately available for comment.

If AOL keeps its stake in Net2Phone, it's clear the leading online service will have to work with Ma Bell. The consortium will have the right to nominate three members to the board of directors of Net2Phone.

Net2Phone's big partnerships

As if the company needed another big partner, Net2Phone has partnered with Yahoo! Inc. (Nasdaq: YHOO). In a separate announcement Friday, Net2Phone said Yahoo bought a 5 percent stake in the company.

Under the terms of the Yahoo agreement, Net2Phone has issued and sold Yahoo about 2.8 million shares of Net2Phone stock for 806,000 shares of Yahoo. The value of the deal was about $150 million.

Net2Phone in 1999 announced distribution pacts with Qualcomm (Nasdaq: QCOM) and Go2Net (Nasdaq: GNET).